Time for an Allocation

The size of the U.S. dollar high yield bond and loan market is over $3 trillion,1 representing nearly 30% of the corporate credit markets.2

There is an incredible size and depth of these high yield bond and loan markets, yet for some reason, it still seems to be viewed as almost a throwaway allocation in portfolios. We would argue that these two asset classes should now be part of the new “core” of fixed income portfolios.

Historically “core” fixed income consisted of highly rated corporate bonds, government/agency securities and mortgages. Holding Treasuries as a hedge against systemic risk is something we can support and understand. Yet given the yields of today, how many investors are looking to build a core portfolio with these types of securities and yields of 2.25-3.25%?3

We would not view this as attractive and would expect many others would feel the same, yet many institutional investors seem to have ingrained in them to invest largely in these assets classes regardless of yield. We would view this as outdated thinking, as today’s high yield bond and floating rate loan markets bear little resemblance to those of 25 years ago, when the market was just starting, yet many investors believe them to be “high risk” asset classes.

The high yield and floating rate loan markets are large and growing markets, with what we see as attractive opportunities for active managers who are able to look for value and identify potential mis-priced securities.

The AlphaBaskets blog provides frequent market insight and commentary by AdvisorShares Investments, LLC, created by AdvisorShares and other leading active managers. AdvisorShares Investments is an SEC-registered investment adviser and the investment adviser to the AdvisorShares actively managed ETFs. The views expressed on AlphaBaskets should not be taken as investment advice or a recommendation for any of the actively managed ETFs advised by AdvisorShares.